Benefits Monthly Minute
Final Regulations Make 401(k) Hardships Easier
On September 19, 2019, the final regulations were published making 401(k) hardships easier for participants. Although there are no major departures from last year’s proposed regulations, plan administrators will want to be aware of several key updates, including –
- The list of safe harbor expenses that are considered to satisfy the “immediate and heavy financial need” threshold has been expanded: the home casualty hardship reason is not limited by IRC 165(h)(5) and need not be in a federally declared disaster area, and expenses incurred as a result of certain federally declared disasters are now added to the list of safe harbor expenses for employees who live or work in a disaster area. Relatedly, the Treasury and IRS expect that no more special disaster-relief announcements will be needed.
- Primary designated beneficiaries under the plan may be included among the individuals for whom qualifying medical, educational and funeral expenses may be incurred.
- As in the proposed rules, the six-month suspension of 401(k) contributions is prohibited. There is also no requirement to take plan loans prior to obtaining a hardship distribution (plans may still choose to include a loan requirement).
- Hardship distributions are now permitted from elective contributions, QNECs, QMACs and earnings thereon, but plans may still opt to limit the type of contributions available for hardships.
- The rules for determining if a distribution is necessary to satisfy immediate and heavy financial need are simplified: a hardship distribution may not exceed the amount of the need, the employee must have obtained other available, non-hardship distributions, and the employee must provide a representation that he/she otherwise has insufficient cash or liquid assets. Regarding employee representations, telephonic verbal representations are permitted if recorded. Further, plan administrators may rely on an employee’s representation absent actual knowledge to the contrary. The guidance states that the “actual knowledge” rule is limited to situations where the plan administrator already has sufficiently accurate information to determine the employee’s veracity.
- Minimum distribution amounts for a hardship are permitted, as long as they are nondiscriminatory.
Although the new hardship rules may make hardship withdrawals less burdensome for employees, keeping up with the operational updates may be a challenge. Since many of the hardship changes are permissive, plan administrators will want to consider which of these changes are consistent with their goals. If those goals include providing participants with more access to savings in times of pre-retirement need, then taking steps to loosen the restrictions on hardship withdrawals presents a meaningful opportunity. To take full advantage of this opportunity, in addition to adopting plan amendments effective for January 1, 2020, be sure to communicate these changes to your participants in the SPD, SMM and safe-harbor notice.
Your Rx Accumulator Program is Safe - For Now
In our August Monthly Minute, we touched on the precarious future of drug accumulator programs in light of recently released guidance that appeared to significantly limit their application and usefulness from a cost-management perspective. Some of those fears have just been put to rest – for the time being. On August 26, 2019, new guidance was released that acknowledged certain ambiguities about the treatment of drug manufacturer’s coupons in circumstances other than in which there is a medically appropriate generic equivalent available. Although the new guidance did not actually rectify the ambiguity, it did provide that clarifying rulemaking will be forthcoming for 2021. And, perhaps more importantly, until the 2021 rulemaking is issued and effective, the Departments stated that they will not initiate enforcement action if a group health plan excludes the value of drug manufacturers’ coupons from the annual limitation on cost sharing, including in circumstances in which there is no medically appropriate generic equivalent available. In short, this is good news for your 2020 accumulator program.
Appeal PTCs Now, and Save Money Later
Has your employee sought premium tax credits (PTCs) for coverage under a health insurance marketplace? If so, this could be an opportunity for you to reduce your ACA penalty risk. When an employer receives notice from a health insurance marketplace that an individual is eligible for PTCs, the best course of action is to read the notice carefully and ask plenty of questions: What is the deadline to appeal? Is this individual still an employee? Are you an applicable large employer under the ACA? Is the employee full-time or part-time? Was affordable, minimum value coverage offered to the individual? Did the individual enroll in employer-sponsored coverage? Because ACA penalties hinge on an individual’s receipt of PTCs in connection with marketplace coverage, a successful appeal can help employers lessen the risk that the IRS will impose ACA penalties in the future. So, although you may not be required to reply to notices describing employee PTC determinations, taking a proactive approach now can reap rewards later.
KMK Employee Benefits and Executive Compensation email updates are intended to bring attention to benefits and executive compensation issues and developments in the law and are not intended as legal advice for any particular client or any particular situation. Please consult with counsel of your choice regarding any specific questions you may have.